To some, the vote to leave the European Union feels like the world is about to come to an end. To others, a new avenue of opportunity has opened before them. But what’s the reality? Retail expert Adam Bernstein investigates
The electorate has spoken and in a stunning victory for the Brexit campaign, the UK is to leave the European Union. But what does the vote really mean – how will our economy and businesses be affected?
The first point to note is that article 50 of the Lisbon Treaty, the clause that determines how a member state leaves the EU, is not, despite the former Prime Minister David Cameron’s original promise, going to be triggered immediately. Not unsurprisingly, Mr Cameron has resigned saying that it will be the job of a new party leader and Prime Minister to start the exit process. That person is now Theresa May. But if law firm Mishcon de Reya win their argument, article 50 cannot be triggered until parliament repeals the 1972 European Communities Act – the legislation which enshrines the UK’s membership of the EU – irrespective of what politicians declare.
Immediately after the vote was announced Mr Cameron tried to steady the ship – something that Mark Carney, the Governor of the Bank of England and George Osborne, the Chancellor of the Exchequer at the time also wanted to do. However, the markets were clearly in a panic. Consider that in the summer of 2015 the pound against the euro had risen to €1.42, but by the start of week of the vote it was down to €1.24. As the polls closed it had risen to €1.31 but once the vote result was made public it dropped through the floor to €1.22. However, now that we have a new Government and some form of stability it has recovered to (at the time of writing) €1.20. The dollar did something similar and fell to $1.32 – a 10% fall to a rate not seen since 1985 – but is back up to almost $1.34. Not good but could be worse.
The London stock market saw just as much turmoil and had fallen more than 8% over the morning after the vote before recovering to only being 4% down – again, something not seen since the collapse of Lehman Brothers in 2008, the precursor to the last recession. Other global markets followed suit – Italy was down 11%, Germany fell 7.5%, and France had lost 9%. By July 15, London was 5% up on the pre-vote close while other markets recovered too but were still underwater – Italy was 7% down, Germany 2% down, and France 3.5% down. The only saving grace is, as Mr Carney put it, that the banks have more cash in reserve and have been stress tested so that bank failure is very unlikely.
So what now?
UK law, at least that based on EU legislation, isn’t going to change overnight and in many cases will mirror whatever Brussels passes. Why? Because if the UK is to trade with Europe we’ll have to comply with their rules. In other domestic matters, such as health and safety and employment law, the former follows much that is common sense and with regard to the latter, it would take a very brave government to repeal legislation that gives, for example, workers holiday entitlements and rest breaks while offering protection from discrimination. What will be interesting to see is how, post-exit, UK firms do in recruiting staff as it’s entirely possible that the automatic right of EU nationals to live and work in the UK could be curtailed (and vice versa). Indeed, commentary from consulting firm KPMG suggests that firms could see new hurdles when recruiting skilled workers. Even HMRC has gone on record to say that nothing, in tax law, has changed.
But there are other areas for concern. Will the UK stay part of the Single Euro Payments Area, the system for simplifying cross border euro bank transfers? While the UK is not part of the euro zone, many firms will have euro accounts.
There will also be issues with the free movement of goods, capital and people. Border controls will change for British travellers making clearing customs a slower process, while firms buying or selling in Europe may well find that tariffs and controls are imposed adding increased cost and time when moving goods. The flipside is that the UK will be free to negotiate its own trade deals with non-EU countries and it’s arguable that importers could see some duties on goods fall and, with much manufacturing done in the Far East, that could be something positive.
However, those in the KBB sector that manufacture in Europe and ship to the UK will find their cost structures changing. In the short term, and until the pound recovers, the cost of imports will rise, while exporters should be able to capitalise on their position of being more competitive. It’s entirely possible that, for example, Mobalpa selling into the UK will become more expensive while Smallbone of Devizes that sells into the US becomes markedly more competitive with buyers over there.
Many commentators believe that the end result of a weak pound, however, is going to be rising inflation which in turn will place extra pressures – including that on demands for rising pay – on businesses already struggling to cope with rising competition. Some technology firms, including Dell and One Plus One, are already increasing prices because of the drop in the pound – it’s only a matter of time before kitchen appliances start to rise in price. Another serious element to consider is the cost of oil – priced in dollars – and the Petrol Retailers Association predicted the 3p per litre plus rise in fuel despite a fall in the price of oil. This will price itself into both oil-based products (plastics used in packaging of cosmetics for example) and the cost of deliveries.
While the Bank of England is not going to make any knee-jerk reaction changes, and Mr Carney was very calm when he addressed the cameras, the reality is that he said that the bank would take “all necessary steps” to support the financial system. Clearly the bank had already drawn up contingency plans, which included deploying up to £250bn to support the pound and quite possibly altering interest rates. Some suggested that rates could rise to make the pound more investable, while others were advocating that rates could fall to zero (from 0.5%) to shore up the UK economy. Interestingly, the markets didn’t react much when interest rates weren’t changed when the Bank board met in July, despite widespread anticipation of a rise.
Leaving the EU – and the run-up to the event – could bring misery for some. As noted, the stock markets have fallen and the banks and the house builders in particular have seen their shares hit badly – at the time of writing Bovis Homes shares were down 25%, as were Taylor Wimpey and Persimmon. Looking at home and electrical retailers, Dixons Carphone were down 22% and AO had lost 13%. Could this be a forecast of the end of the housing boom? Will it have a knock-on effect on home renovations? After all, rising prices gives homeowners the feeling of wealth. Alternatively, those that cannot move may choose to improve their homes.
Share performance depends on profits, so those investing in exporters should do well. But by extension, others may, depending on business sector, perform less favourably as the falls in the stock market have proven. This will undoubtedly affect those with pensions, ISAs and other forms of stock-based investment. And if the Bank of England steps in to help the economy with more quantitative easing (in essence, ‘printing’ electronic money), it’ll adversely affect bond rates which, among other things, will lower annuity rates for pensioners. Badly timed, but the Government announced at the end of June that household incomes had risen to an average £473 a week – £800 a year more than in 2013 to 2014. It’ll be interesting to see the figures announced in June 2017.
And what is likely to happen to taxation? Some are suggesting that elements of taxation could fall away because of the end of being a net contributor to the EU’s coffers and the removal of the requirement to have a minimum rate of VAT (15% for standard rated items, 5% on domestic fuel). Others, including the Institute of Fiscal Studies, believe that the Government’s austerity programme could be further extended even though the former Chancellor had planned to end the programme and also lower corporation tax to 15%.
One thing is certain: We are now slowly walking towards a brave new world.